Friday, October 30, 2015

Securities and Exchange Commission says "Go ahead, make my day..."

As we forecast, today (10/30/15) the US Securities and Exchange Commission (SEC) voted 3 to 1 to allow small companies to raise up to $1 million online. Small firms and startups can now solicit anyone, regardless of their location, net worth or wealth, thereby giving small investors a chance to own what may be the next Facebook or Google (or not).

More likely, it means the day care center or restaurant down the street can now offer ownership stakes, or shares of stock, to their most supportive customers and clients. This is great news for women and Black-owned firms, which tend to be small and capital starved. The SEC vote approving rules implementing Title III of the JOBS Act means greater opportunity for minority, women and veteran firms to obtain equity funding.

In addition to allowing firms to raise capital from anyone via a crowdfunding platform (a Financial Industry Regulatory Authority or FINRA registered internet website set up specifically for this purpose), the SEC also approved rules making it easier for companies to sell stock in small or startup companies to potential investors residing in the state in which the startup (or small firm) is located. This is another potentially beneficial capital raising option for Black owned firms, which tend to be hyper-local.

The new rules are not without drawbacks, however. Crowdfunding platforms will be allowed to accept stock in lieu of payment for capital raising services provided, so small firms will have to watch out for crowdfunding platforms that charge, say 50% of your stock to help you get funded. Given the lack of brokerage firm ethics we saw in the years leading up to the financial crisis, this is serious issue, but the potential for good far outweighs the downside.

Raising equity, or selling ownership shares, is a very difficult and complicated task, mainly because of the convoluted rules governing how you can do so. Today's SEC action makes it a little easier to get the capital needed to launch (or enlarge) your firm.